The Bank of England is pushing ahead with its plan to restrict how much debt hedge funds may use when trading UK government bonds, despite warnings that it will raise borrowing costs and reduce liquidity in the nearly £3tn gilt market.
Hedge funds have become an increasingly important part of gilt trading, accounting for about 30 per cent of transactions in the market, which determines borrowing costs for the government and, by extension, for business and consumers across the economy.
Popular hedge fund strategies, such as trades targeting the difference in price between a gilt and a derivative of the same maturity, are leveraged up through borrowing in the so-called repo market, in which investors sell bonds and promise to repurchase them a short time later.